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DEBT FINANCING

5 Money Mistakes You Don't Want to Make

When looking for capital, many business owners make these critical errors.
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Entrepreneurs are often so busy running their businesses that they make common mistakes that could wind up costing valuable time and money. Make sure you avoid making any of the blunders below.

1. Being Disorganized

Yes, taking care of your day-to-day operations and putting a heavy emphasis on satisfying your clients should take precedence over organizing your receipts and updating your financials, but these important things can't be ignored for too long.

Lenders see out-of-date financials as a sign of poor money management, and it can reflect poorly on you as a business owner and on your ability to pay back a loan. Set aside a time each week (or every other week, if absolutely necessary) to update your balance sheets, accounts receivable, inventory, current liabilities, and your profit and loss statements. All small-business owners should reasonably be able to discuss the numbers from these financials for the past two weeks of their business, especially when seeking a loan.

2. Being Ill-informed

One of the biggest pieces of advice that I repeatedly give small-business owners and entrepreneurs is to know their options. There are hundreds of loan programs available, and not knowing about the different sources of capital can end up costing you more money in the long run. For example, taking a cash-advance loan because it's fast and convenient could have you paying back thousands more than an SBA express loan would.

3. Not Networking

Imagine a startup CEO who solely networks with lenders who require companies to have been in business two years before even considering them for loans. Or a company that makes apps not returning phone calls from a tech investor. Many small-business owners fail to identify the most appropriate financing targets for their specific business.

4. Borrowing Too Much

When considering a loan, many small-business owners think too big. Don't make the mistake of borrowing money to fuel your business for the next five or 10 years--you only really need enough money to make progress this year. Borrowing a large amount of money not only means that you will need sufficient collateral and cash flow to cover the debt but also that you'll have to pay back that amount plus interest. Think about what you can actually afford and how it will affect your business.

5. Blindly Trusting Your Partner

Entering into a relationship with an investor or lender should be a two-way partnership, just like a marriage. As a mutually beneficial relationship, people make a loan to or invest in your business to make money, and you are taking the money or giving up equity in order to improve your business and cash flow. Just as lenders and investors interview you to see if you are a good fit, you should also interview them to achieve the same.

Ask loan officers questions about previous loans they have made and what their personal approval rate is within their organization. Ask potential investors how many investments they've made in the past year, and carefully consider how much influence the investor will have in making business decisions. Know that there are thousands of options when it comes to lenders and investors, and that not all of them will be right for you and your business.

IMAGE: Corbis
Last updated: May 20, 2014

AMI KASSAR | Columnist | CEO, MultiFunding.com

Ami Kassar is founder and chief executive of MultiFunding, which helps small-business owners find the best business-loan options. Kassar speaks regularly at universities and small-business events about entrepreneurship and access to capital. He has an M.B.A. from the University of Southern California and a B.A. in American studies from Brandeis University. He lives in the Philadelphia suburbs with his wife and two children.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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